Abstract:
We argue that a familiarity bias of target shareholders enables bidders to choose the payment method in M&As opportunistically. We employ the Stambaugh, Yu and Yuan (2015) mispricing score to identify overvalued bidders, reconfirming that overvaluation is one of the main drivers of the payment choice in M&As. Using an instrumental variable approach based on exogenous price pressure, we provide novel evidence that bidder mispricing causally affects the percentage of stock payment. Further analyses unveil that target shareholders more familiar with the bidder are more likely to accept overvalued equity despite adverse market reactions. Finally, we show that targets
of opportunistic bidders are not compensated through higher offer premiums and that shares of overvalued bidders underperform in the long-run. Our results suggest that behavioral biases of shareholders contribute to the transmission of stock market inefficiencies to the market for corporate control.